How States Are Targeting High Prescription Drug Prices

The United States pays far more for prescription drugs than other high income countries, 30% – 190% more per capita, according to a Commonwealth Fund study.  Across the aisle, politicians have frequently and repeatedly stated they want to tackle these high prices.  Still, many companies announced price increases of drugs in their portfolios by nearly 10% in January of this year.

New Department of Health and Human Services Secretary, Alex Azar, has pledged to make high prescription drug prices his top priority.  Despite his pledge, it is unclear whether he can achieve this goal.  Citing two proposals in the White House budget, Azar claimed that he could help reduce drug costs by (1) shifting the cost burden of Medicare Part D prescription drug funding to private insurers and away from the federal government and (2) recalculating the out-of-pocket-cost of Medicare prescriptions by ignoring discounts and incentivizing insurance companies to steer patients to generics over brand name drugs.  Azar’s discussion of these policies, however, resulted in bipartisan skepticism from Senators Bill Cassidy (R) and Sherrod Brown (D).

States have begun to target high prescription drug prices by experimenting with a variety of different approaches.  On March 1, 2018, the Oregon Senate passed a house bill by a 25-4 margin, sending it to Governor Kate Brown’s (D) office for signature.  This bill would require prescription drug manufacturers to report information relevant to a cost increase of 10% or more over the previous calendar year, including research and development costs, manufacturing and distribution costs, marketing costs, total revenue for the drug in the previous calendar year, total profit for the drug in the previous calendar year, price when the drug was introduced, “the 10 highest prices paid for the prescription drug during the previous calendar year in any country other than the United States,” and any other factors deemed relevant for the price increase.  The bill authorizes civil penalties for inaccurate reporting, defective reporting, and untimely reporting.  Lastly, this bill also targets insurers by requiring them to disclose the 25 most frequently prescribed drugs, the 25 most costly drugs as a portion of total annual spending, the 25 drugs that have caused the greatest increase in total plan spending from one year to the next, and the impact of the costs of prescription drugs on premium rates.

Effectively, Oregon is injecting a measure of transparency to the marketplace.  By requiring this information, Oregon is taking a market-based approach, by fixing a market failure.  If the prescription drug manufacturers have a bona fide justification for raising prices, then this bill would provide them with public cover and credibility for their decisions.  However, if the prescription drug manufacturers are merely exploiting a captive marketplace with inelastic demand by insincerely citing research and development costs or other vague factors, the general public will have an opportunity to call foul.  However, this bill does not stop a manufacturer from raising its drug prices by a percentage less than 10% each year.  We should anticipate drug companies using a 10% price inflation factor, which it appears they have already begun doing, as mentioned in the first section.

On February 27, 2018, the Vermont Senate voted unanimously to import prescription drugs from Canada.  The Utah House of Representatives also passed a similar bill, which will go onto the Senate, to begin the process of creating a program to import prescription drugs from Canada.  These proposals would require a federal waiver if signed into law, as it is currently illegal to do so, pursuant to 21 U.S.C. § 384, which concerns importation of prescription drugs.

New York passed a law threatening manufactures with requirements to submit additional disclosures like effectiveness comparisons and profit calculation data if manufacturers do not cooperate with regulators to provide discounts to state payors.

In October of 2017, California Governor, Jerry Brown (D) signed the nation’s most comprehensive prescription drug pricing bill into law.  California’s law requires prescription drug companies to notify the state if they are increasing prices by 16% over a two year period.  This is significant because it is effectively an 8% cap to manufacturers if they want to avoid the arduous guantlet of public scrutiny.  California also now requires health insurance providers to file annual reports on how drug costs affect insurance premiums in California.

Nevada governor Brian Sandoval (R) signed a bipartisan law on June 15, 2017 specifically targeting manufacturers of insulin, which also aspires to correct market failures by facilitating transparency.  The law requires manufacturers to submit data on pricing, profits made on insulin products and any discounts they grant to middlemen.  The law also obligates insulin manufacturers to disclose insulin price increases, which surpass the previous year’s inflation rate, and authorizes fines of $5,000 per day for noncompliance.  This law is significant because it uses the overall inflation rate as a benchmark for prescription drug prices (albeit on just one product) as opposed to a 10% or an 8% threshold.

Maryland may get the top prize for innovation, however, by targeting drug prices directly, as opposed to implementing market based reforms.  Their state legislature is currently considering a bill that would go yet further than other states by establishing a commission to place price controls on brand name pharmaceuticals that health plans, pharmacies and state programs would be required to pay.

It will be interesting to see whether the federal government supports the ambitions of state governments by authorizing waivers for importation of drugs from Canada.  We should also expect pharmaceutical companies to challenge Maryland’s proposal in the court system based on interference with intellectual property rights and usurpation of Congress’ power to regulate commerce.  Lastly, we should expect more states to follow the lead of Oregon with price transparency laws, as these market based approaches seem to accord with political ideologies across the aisle.  The debate going forward will likely center around what percentage increases will trigger disclosure requirements.

-Andrew Hennessy-Strahs

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